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SUMMARY CHAPTER 8
PRICING AND OUTPUT DECISIONS : PERFECT COMPETITION AND MONOPOLY

First of all, before the firms establish their prices and output levels in order to achieve their
business objective, they should know about the framework of four basic types market. Such as:

1. Perfect Competition (No market Power)

- Large number of relatively small buyers and sellers
- Standardized product
- Very easy market to entry and exit
- Complete information by all market participants about the market price

2. Monopoly (absolute market power subject to government regulation)

- One firm, firm is the industry
- Unique product or no close subtitutes
- Market entry and exit difficult or legally impossible
- Nonprice competition not necessary

3. Monopolistic Competition ( narket power based on product differentiation)

- Large number of relatively small firms acting independently
- Differentiated product
- Market entry and exit relatively easy
- Nonprice competition very important.

4. Oligopoly ( market power based on differentiation and/or the firm’s dominance the market)
- Small number of relatively large firms that are mutually interdependent
- Differentiated or standardized product
- Market entry and exit difficult
- Nonprice competition very important among firms selling differentiated products.

In the perfect competition, firms have no control over the price and must compete on the
basis of market price establish by the forces supply and demand. There is no way for a particular firm
to change a higher price than its competitor because everyone sells a standardized product. A firm in
this market has no market power and acts only as a price taker. For example in Indonesia, a perfect
competition is happened in Cipinang Market Jakarta . This place is very identic and iconic in Jakarta
for buying rice, and the biggest one as well. The most important lesson that managers can learn by
studying the perfectly competitive market is that it is extremely difficult to make money in a highly
competitive market. Indeed, the only way for firms to survive in perfect competition is to be as cost
efficient as possible because there is absolutely no way to control the price.
The monopoly firm has a considerable amount of market power. Because it is only seller in
this type of market, it has the power to establish the price at whatever levels it wants, subject possible
constraints such as government regulation. It is the consummate price maker. The example of
concrete case about monopoly in Indonesia is PLN. PLN is a state entreprises who provide electricity
in Indonesia. PLN is the one and only firm who can sell the electricity to the people in Indonesia, not
only for household needs, but also for industry. Actually in Indonesia, when a firm goes to monopoly
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situation, that will be owned by government. In monopoly markets not sanctioned by the government
via regulations or patent laws, a monopoly presents a manager with somewhat of a paradox. The key
point is that a monopoly firm’s ability to set its price is limited by the demand curve for its product
and, in particular, the price elasticity of demand for its product
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SUMMARY CHAPTER 9
PRICING AND OUTPUT DECISIONS : MONOPOLISTIC COMPETITION AND
OLIGOPOLY

Monopolistic competition and oligopoly are considered imperfect competition because firms
in these markets have the power to set their prices within the limits of certain constraints.
Monopolistic comapetition is a market distinguished from perfect competition in that each seller
attempts to differentiate its product from those of its competitors such as location, efficiency of
service, product attributes, advertising, or promotion. Some of the best examples of monopolistic
competition can be found in the retail trade or in services. Restaurants, grocery stores, dry cleaners,
stationery stores, florists, hardware stores, pharmacies, and video rental stores are all markets in
which entry is fairly easy and the number of sellers is relatively large. In these businesses, owner-
managers may use location, or a slightly different mix of product offerings to differentiate their
business.
Oligopoly is a market dominated by a relatively small number of large firms. The products they
sell may be either standardized or differentiated. Part of the control that firms in oligopoly markets
exercise over price and output stems from their ability to differentiate their products. But market
power also comes from their sheer size and market dominance. the sellers in an oligopolistic market
compete against each other by differentiating their product, dominating market share, or both, the
fact that there are relatively few sellers creates a situation where each is carefully watching the other
as it sets its price. If a firm lowers its price, this may have an immediate impact on the competition.
This firm takes its action to increase sales by drawing customers away from the higher-priced
competitors, but when competitors realize what is happening (i.e.,their sales are declining), they will
quickly follow the price cut to maintain their market share. If this firm undertakes the opposite
action—a price increase—incorrectly assuming competitors will follow suit, its sales will drop
markedly if competitors fail to do so.

The key to the pricing power of firms in monopolistic competition and oligopoly is their ability
to differentiate their product so they are not mere price takers who are subject to the tyranny of
supply and demand. All efforts to do so are referred to in economics nonprice competition.

Nonprice determinants of demand include any factor that causes the demand curve to shift.
They are :
(1) tastes and preferences
(2) income
(3) prices of substitutes and complements
(4) number of buyers
(5) future expectations of buyers about product price.

Nonprice variables are those factors that managers can control, influence, or explicitly
consider in making decisions affecting the demand for their goods and services. These variables are :
(1) advertising
(2) promotion
(3) location and distribution channels
(4) market segmentation
(5) loyalty programs
(6) product extensions and new product development
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(7) special customer services,

(8) product “lock-in” or “tie-in,” and
(9) preemptive new product announcements
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PART IV
MEASURING NATIONAL OUTPUT AND NATIONAL INCOME

The key concept in the national income and product accounts is gross domestic product (GDP).
Trying to understand the macroeconomy without understanding national income accounting is like
trying to fix an engine without a mechanical diagram and with no names for the engine parts. GDP is
the total market value of a country’s output. It is the market value of all final goods and services
produced within a given period of time by factors of production located within a country. GDP is a
critical concept. Just as an individual firm needs to evaluate the success or failure of its operations
each year, so the economy as a whole needs to assess itself. GDP, as a measure of the total production
of an economy, provides us with a country’s economic report card.
Many goods produced in the economy are not classified as final goods, but instead as
intermediate goods. Intermediate goods are produced by one firm for use in further processing by
another firm. For example, tires sold to automobile manufacturers are intermediate goods. The parts
that go in Apple’s iPod are also intermediate goods. The value of intermediate goods is not counted
in GDP. It will caused doubel counting. Double counting can also be avoided by counting only the value
added to a product by each firm in its production process. The value added during some stage of
production is the difference between the value of goods as they leave that stage of production and
the cost of the goods as they entered that stage. In calculating GDP, we can sum up the value added
at each stage of production or we can take the value of final sales. We do not use the value of total
sales in an economy to measure how much output has been produced. GDP is concerned only with
new, or current, production. Old output is not counted in current GDP because it was already counted
when it was produced. It would be double counting to count sales of used goods in current GDP. If
someone sells a used car to you, the transaction is not counted in GDP because no new production
has taken place.
GDP can be computed two ways. One way is to add up the total amount spent on all final
goods and services during a given period. This is the expenditure approach to calculating GDP. The
other way is to add up the income—wages, rents, interest, and profits—received by all factors of
production in producing final goods and services. This is the income approach to calculating GDP.
These two methods lead to the same value for GDP for the reason we discussed in the previous
chapter: Every payment (expenditure) by a buyer is at the same time a receipt (income) for the seller.
We can measure either income received or expenditures made, and we will end up with the same
total output.
There are also four main categories of expenditure:
1. Personal consumption expenditures (C): household spending on consumer goods
2. Gross private domestic investment (I): spending by firms and households on new capital,
that is, plant, equipment, inventory, and new residential structures
3. Government consumption and gross investment (G)
4. Net exports (EX - IM): net spending by the rest of the world, or exports (EX) minus
imports (IM)

GDP = C + I + G + (EX - IM)

(Formula to Calculate GDP)
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Many transactions are missed in the calculation of GDP even though, in principle, they should
be counted.Most illegal transactions are missed unless they are “laundered” into legitimate business.
Income that is earned but not reported as income for tax purposes is usually missed, although some
adjustments are made in the GDP calculations to take misreported income into account. The part of
the economy that should be counted in GDP but is not is sometimes called the underground economy.
Why should we care about the underground economy? To the extent that GDP reflects only a part of
economic activity instead of a complete measure of what the economy produces, it is misleading.
Unemployment rates, for example, may be lower than officially measured if people work in the
underground economy without reporting this fact to the government